Sensex crashes 2,000 points in 3 days: 5 reasons behind the market drop

Stock Market Today: The Indian stock market has been experiencing a significant downturn for three consecutive sessions. On Wednesday, December 18, both the Sensex and Nifty 50 fell by 0.80 percent during intraday trading. This decline was not limited to blue-chip stocks, as the BSE Midcap and Smallcap indices also dropped by 1 percent.

The Sensex closed 502 points, or 0.62 percent, lower at 80,182.20, while the Nifty 50 ended the day at 24,198.85, down 137 points, or 0.56 percent. The BSE Midcap index dropped by 0.61 percent, and the Smallcap index lost 0.76 percent. Overall, the Sensex has declined by 1,951 points over the past three days.

The market capitalization of BSE-listed firms decreased from ₹459 lakh crore on Friday, December 13, to nearly ₹453 lakh crore, resulting in a loss of about ₹6 lakh crore for investors in just three sessions.

Nifty 50 Falls Below 20-Day SMA

Shrikant Chouhan, head of equity research at Kotak Securities, noted that the market faced selling pressure at higher levels. A bearish candle on the daily charts and a lower top formation on the intraday charts suggest further weakness. The Nifty Index closing below the 20-day SMA is a negative short-term signal. Chouhan believes the market texture is weak, with further sell-offs possible if it falls below 24,150, potentially dropping to 24,000. Conversely, a rise above 24,250 could trigger a quick pullback rally to 24,350-24,400.

Sectoral Indices Performance

Most sectoral indices experienced losses on Wednesday. The Nifty Media index and Nifty PSU Bank index each fell by over 2 percent. Nifty Bank, Financial Services, Private Bank, and Metal indices also saw losses exceeding 1 percent each. However, the Nifty Pharma index and Nifty IT index saw mild gains.

5 Reasons Behind the Market Fall

1. Caution Ahead of US Fed Policy Outcome

Investors are cautious ahead of the US Federal Reserve's policy decision due later today. Amid concerns about sticky inflation and slowing growth, the market anticipates a 25 bps rate cut. However, the updated economic projections and the Fed's dot plot will shape expectations for future interest rates.

2. Weakness in the Rupee

The Indian rupee hit a record low of 84.95 per dollar, impacting market sentiment. A weak currency accelerates foreign capital outflow, keeping market sentiment low. Analysts expect the rupee to trade with a negative bias due to weak domestic markets and a strong US dollar.

3. Foreign Capital Outflow

Foreign portfolio investors (FPIs) resumed selling Indian equities amid a rising dollar and US bond yields. FPIs sold Indian equities worth ₹6,409.86 crore on December 17 and ₹278.70 crore on December 16. Year-end selling by FPIs, driven by dollar appreciation and uncertainty around US Fed policy, has accelerated capital outflows.

4. Losses in Banking Heavyweights

Banking heavyweights, including HDFC Bank and ICICI Bank, have been major drags on the benchmark indices. The Nifty Bank index dropped 1.32 percent, with the PSU Bank and Private Bank indices falling 1.92 percent and 1.11 percent, respectively. The Nifty Bank index has lost nearly 3 percent in the past three days.

5. Deteriorating Macroeconomic Indicators

India's trade deficit widened to a record high in November due to high gold imports. The deficit hit $37.84 billion, compared to $21.31 billion in November 2023. This, coupled with the lowest GDP growth in nearly two years, has negatively affected market sentiment. Premium valuations above the current earnings growth trajectory and concerns about policy shifts from the incoming US administration have also contributed to the cautious market sentiment.

The Indian stock market's recent decline can be attributed to a combination of global economic factors, currency weakness, foreign capital outflows, losses in key sectors, and deteriorating macroeconomic indicators. Investors are advised to stay cautious and monitor these developments closely.